1965 (3) TMI 6 - HC - Income Tax

Court nullifies post-penalty reduction actions in tax recovery case, emphasizes compliance with natural justice principles

Behari Lal Baldeo Prasad Versus Commissioner, Jhansi Division, And Others.

The court ruled in favor of the petitioner, a Hindu undivided family, in a tax recovery case. It found that subsequent proceedings post a penalty ... Recovery certificate issued by ITO - recovery proceedings are quashed Issues Involved:1. Validity of the income-tax recovery certificate and subsequent proceedings.2. Effect of the reduction in penalty by the Income-tax Appellate Tribunal.3. Applicability of the Taxation Laws (Continuation and Validation of Recovery Proceedings) Act, 1964.4. Validity of the sale of properties for recovery of tax demand.5. Compliance with principles of natural justice in vacating the stay order.6. Jurisdiction of the High Court under Article 226 of the Constitution.7. Competence of the Hindu undivided family to present the petition.8. Existence of an adequate alternative remedy.Detailed Analysis:1. Validity of the Income-tax Recovery Certificate and Subsequent Proceedings:The petitioner, a Hindu undivided family, was assessed to income-tax and penalties amounting to Rs. 33,695. A recovery certificate was issued on July 20, 1959, under section 46(2) of the Income-tax Act, 1922. The petitioner argued that a communication dated February 7, 1961, from the Income-tax Officer to the Collector constituted a fresh recovery certificate. However, the court found that this document was merely an intimation and did not nullify the original recovery certificate.2. Effect of the Reduction in Penalty by the Income-tax Appellate Tribunal:The Income-tax Appellate Tribunal reduced the penalty on December 6, 1961, by Rs. 13,300. According to the Supreme Court's decision in Income-tax Officer v. Seghu Buchiah Setty, any steps taken for recovery based on the original order become null and void if the order is varied by an appellate authority. Therefore, the proceedings based on the original recovery certificate became null and void post-December 6, 1961.3. Applicability of the Taxation Laws (Continuation and Validation of Recovery Proceedings) Act, 1964:To counter the Supreme Court's decision, Parliament enacted the Taxation Laws (Continuation and Validation of Recovery Proceedings) Act, 1964. Section 5 of this Act applies retrospectively to all notices of demand. However, the court noted that the taxing authority failed to give intimation of the penalty reduction to the Tax Recovery Officer, as required by sub-clauses (2) and (3) of section 3(b). Non-compliance with these mandatory provisions rendered the proceedings null and void.4. Validity of the Sale of Properties for Recovery of Tax Demand:The properties were sold on November 12 and 13, 1963, for Rs. 35,100. Since the reduction in penalty was not communicated, the proceedings continued for the original demand, violating sub-clauses (2) and (3) of section 3(b). Therefore, the sales were deemed without jurisdiction and void.5. Compliance with Principles of Natural Justice in Vacating the Stay Order:The Inspecting Assistant Commissioner vacated a stay order ex parte on April 15, 1964, without giving the petitioner an opportunity to explain. The court held that this action violated the principles of natural justice, as the petitioner should have been afforded an opportunity to clarify any misapprehensions.6. Jurisdiction of the High Court under Article 226 of the Constitution:The High Court has the jurisdiction to issue writs, directions, and orders to ensure justice. The court emphasized that it is not bound by technical limitations and can pass orders to repair breaches of fundamental rights. Therefore, it directed the restoration of possession of the auctioned properties to the petitioner.7. Competence of the Hindu Undivided Family to Present the Petition:The court held that the Hindu undivided family continued to exist for the purposes of the Income-tax Act until an order of partition was recorded by the Income-tax Officer. Therefore, the family was competent to present the petition.8. Existence of an Adequate Alternative Remedy:While the existence of an alternative remedy is a factor in exercising jurisdiction under Article 226, it is not a bar. Given the violation of fundamental rights, the court found it appropriate to exercise its jurisdiction to undo the mischief.Conclusion:The petition succeeded. The court quashed the actions taken in the recovery proceedings after December 6, 1961, set aside the auction sales and the order confirming the sales, and quashed the order vacating the stay. The parties were restored to the position as of December 6, 1961, and the respondents were directed to restore possession of the auctioned properties to the petitioner.